Abercrombie & Fitch Stuns: Q3 Profit Jumps 40%

In Industry News, Reports, What's New by Accessories Staff1 Comment

Opening celebration at Abercrombie & Fitch’s Dublin, Ireland store

New Albany, OH—Shares of Abercrombie & Fitch jumped as much as $9 today after the teen-oriented retailer reported a 40% surge in its third quarter profit.

In a turnaround from previous quarters when the company had sales misses and was forced to find new sourcing and close stores, Abercrombie’s sales rebounded in its U.S. stores and strongly upturned in its international division.

For the quarter ended Oct. 27, Abercrombie posted net income of $71.5 million, or 87 cents a share, compared with $50.9 million or 57 cents a share, in the same quarter 2011.

Net revenue rose 9% to $1.17 billion, led by a 37% rise in international markets. In the United States, including direct-to-consumer sales, were flat at $818.6 million. Total international sales hit $351.1 million. Total company direct-to-consumer sales (including shipping and handling) increased 20% to $158.3 million.

Total comparable store sales decreased 3% compared to last year and an improvement over the 10% decreased posted in the second quarter. By division, Abercrombie & Fitch’s comp sales decreased 4%, abercrombie kids decreased 3% and Hollister Co. decreased 1%.

Gross profit margin was up 2.4 percentage points to 62.5% helped by a decrease in average unit cost and an international mix benefit despite a slight decrease in average unit retail and adverse currency exchange rates.

‘Merchandising Initiatives Taking Hold’

The third quarter improvements were enough to sail past analysts’ average estimate which expected earnings of 60 cents a share on sales of $1.11 billion, and a comparable store sales decrease of 8.7%.

“These significantly improved financial results reflect progress on several fronts over the past quarter. Our U.S. chain store business posted healthy growth on top of a strong quarter a year ago, and we saw sequential trend improvement in our international business,” said Mike Jeffries, chairman/ceo.

Abercrombie has been battling to maintain market share as its stores are faced with increasing competition from fast fashion retailers such as Forever 21 and H&M. The company has sought out new sourcing including the United States and Central America as well as held off on some store expansions. In June, it announced it would be closing 180 U.S. doors in the new few years in addition to the 135 underperforming stores closed in the last two years.

“Our merchandise initiatives are taking hold,” Jeffries told investors in a conference call. “We’re working to become faster and we’re doing that with conservative plans, shorter lead times…That’s affecting the fashion content of our inventory.”

Based upon its better-than-expected third quarter, Abercrombie raised its full year earnings outlook to $2.85 to $3.00 a share, which would take into account “a mid single digit percentage decrease in comparable store sales for the fourth quarter and a slightly higher gross margin rate for the quarter relative to the year-to-date rate.”

Previously the company had expected full year earnings of $2.50 to $2.75. Analysts’ average estimate expects $2.49 a share.

“With the critical fourth quarter still largely ahead of us and significant macroeconomic uncertainties remaining, we continue to be cautious in our near-term outlook,” Jeffries added.